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San Diego Business Contracts: What is Ambiguity in Contract Language?

When California courts are faced with the task of interpreting contracts because a suit has been brought for breach of contract, the goal is to give the contract the effect mutually intended by the parties. To do that, the courts start with the words in the contract and give them their ordinary and customary meaning unless there is some reason put forward by the parties to suggest a different meaning. See Cal. Civ. Code, §§ 1636 and 1639. Ordinary and common meaning is discarded when the words are being used in some technical or scientific or industry-specific sense. A good example here — for anyone familiar with lumber from a hardware store — is purchasing a “2-by-4” length of wood board. If you measure it, you will discover that it does not measure two inches by four inches. Rather, a “2-by-4” has a meaning based on lumber industry usage. Under rules of contract interpretation set out in the California Civil Code and in the case law, the courts determine the mutual intention of the parties from the time that the contract was formed, not from later when intentions might have changed.

The foregoing explains why it is essential to have an experienced San Diego corporate attorney draft your business contracts. The words used in your contract are the expression of the mutual intent of the parties and will guide the courts. Clear language makes the job “easy” for the judges and leads to “quick” resolutions. By contrast, unclear and confusing language — language that is ambiguous — leads to protracted and expensive litigation.

So, what is “ambiguity” in contract language? Contract language is considered ambiguous when it is capable of two or more constructions where both possible meanings are reasonable.

Ambiguity can arise in many different ways, but two of the most common ways are, first, when the language itself is subject to two or more reasonable interpretations and, second, when the parties present evidence to the court that the language was intended to have a different meaning and that an ambiguity results from the intended use of the language.

An example of the former might be created by inconsistent or contradictory provision in a contract. Let us assume that a contract involves delivery of “vehicles.” The contract has a “definitions” section which defines “vehicle” as anything with wheels and an engine, but in a later section, the contract states that “supplier shall not deliver automobiles.” The conflicting provisions create an ambiguity.

Another example might be a logical problem like this provision: “Employees shall drive only the Company vehicles in the Company parking lot on any given day.” It is possible to interpret this language to mean that employees cannot take Company vehicles out onto the city streets. But that is unlikely to be the intent.

An example of the second kind of ambiguity is where the parties used a commonly understood word, but had a different intent. An example here is from the case of Pacific Gas & Electric Co. v. G.W. Thomas Drayage Co., 69 Cal.2d 33, 37 (Cal. Supreme Court 1968). In that case, the contract at issue required one party (Drayage) to pay for any damage “to property.” There was an accident and Drayage’s employees damaged a turbine owned by Pacific Gas & Electric (“PG&E”). According to the trial court, the contract language was clear. However, Drayage argued that — as between the parties — damage “to property” meant damage to property owned by third parties, not property owned by PG&E or Drayage. Drayage argued that this was how PG&E and Drayage had always used the language. The trial court rejected the argument and ordered Drayage to pay for the damaged turbine. On appeal, the California Supreme Court reversed holding that the past usage of language could properly be raised to demonstrate possible ambiguity.

As noted, when a contract is deemed to be ambiguous, the result is to extend litigation over the meaning of the contract, which increases litigation costs. Without question, it is less costly and better for your business to have good corporate counsel draft and prepare clear and unambiguous contracts from the beginning.

Contact San Diego Corporate Law

For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard provides a full panoply of legal services for San Diego and California businesses including reviewing and drafting clear and unambiguous business contracts. Mr. Leonard can be reached at (858) 483-9200 or via email. Like us on Facebook.

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Michael J. Leonard, Esq., is an award winning attorney whose practice focuses on corporate, securities, contract, and intellectual property law for small and medium businesses. In his practice, Mr. Leonard routinely assists his clients with the formation of business entities, financing through the sale of debt and equity securities, mergers and acquisitions, contract drafting and review including commercial leases, and establishment and licensing of trademarks, copyrights, and trade secrets.